Without Reforms, Chicago's Pension Funds Will Fail

The Mayor's Commission to Strengthen Chicago's Pension Funds released its report today. Although the four City pension funds are badly underfunded, the Commission's report recommended little more than the reforms enacted into law by the Illinois legislature a few weeks ago, which were limited to "new" employees - those who have not yet started to work for the City. (The state legislative reforms, however, exempted the firemen and police from the reforms - even as to "new" employees.)

I was a member of the mayor's commission. I dissented because I believe the recommendations of the Commission do not go far enough. The report which the Civic Committee released today on the state of the Chicago's pensions (online here) shows that in the aggregate the City's pensions are as badly underfunded as those of the State of Illinois.

At the end of 2009, the unfunded pension liability of the City's four pension funds totaled about $14.6 billion, with an aggregate funded ratio of only 43% -- meaning the funds as a group had only about 43% of the value needed to meet the plans' liabilities.

If the assets in these pension funds earn in the range of 4-6% in coming years, the Firemen's fund would run out of money in approximately 2019-2020, and the Policemen's fund would run out shortly thereafter.

In order adequately to fund Chicago's pension funds, if no reforms were made to plan benefits and annual pension funding were increased to actuarially-required levels, in FY2012 total contributions to the pension funds would have to increase from present formula levels of $793 million to $1.5 billion - an increase of $710 million.

The recommendations of the Mayor's Commission would not reduce the current $14.6 billion of unfunded liability, nor would they reduce the current costs of the plans. (However, the City may reduce current funding of the plans because of costs savings to be achieved in future decades.)

By contrast, the recommendations in the report released by the Civic Committee, if adopted and applied prospectively to current employees (while protecting all rights they have earned), would reduce the estimated liability by about $4.4 billion - and would reduce the costs of the plans by approximately $400 million starting immediately following implementation of the reforms.

Our report also makes the point that Chicago's current operating budget is seriously imbalanced, and that the City has had to draw down on surpluses generated by its leases of the Skyway and of the parking meters in order to cover expenses. An increase in City pension funding in the range of hundreds of millions of dollars would threaten even more serious budget imbalances, or tax increases, or both.

It would be calamitous if the pension funds of either the Illinois or Chicago were to run out of money. In order to prevent that from happening, we need two things: serious pension reform (as to current as well as future employees), and also improved funding. The longer we put off these needed steps, the more difficult our pension problems will become.